The psychology behind BIG spending .

I’ve never been a big spender.  I attribute my frugal nature to growing up with parents who weathered a World War and a major economic depression.  My mother washed used aluminum foil to reuse and never bought anything that wasn’t on sale.

It’s fascinating to watch friends splurge on expensive items simply because they want them. And even more fascinating they don’t consider it “splurging”.  The research helps explain what drives people to spend thousands on products and experiences that could cost far less?

 1. Perceived Value & the Placebo Effect

“Research into how cost affects our perceptions shows that price matters so much to our understanding of value that we sometimes rate pricey things as superior or more effective, even if they are the exact same quality as the less expensive option.”

“In one study by The California Institute of Technology (Caltech) and Stanford University scholars, people not only rate the same wine more highly when they’re told it is more expensive, functional magnetic resonance imaging or functional MRI scans taken of their brains while they were drinking the wine suggest participants enjoyed the experience of drinking it more.”

“In another study using placebo pain killers, participants who took a fake pain-killing drug that they were told cost $2.50 per pill experienced more pain reduction during a series of shocks than participants who were told the pill cost only 10 cents.”

2. Searching for Ultimate Experiences

“How does price and perception play into our purchasing decisions outside the laboratory? If an item is twice as expensive, do buyers assume it’s twice as good?”

“Michael Norton, a psychologist and professor of business administration at Harvard Business School says yes. In fact, we may consider the experience to be more than twice as good. We’re motivated to splurge because we’re seeking peak experiences, his research suggests.”

Norton says the same logic can be used to think about why people buy very expensive products or experiences. “There’s an extra boost when you go up in the quality of experiences. So, it’s possible that a $10,000 bottle of whiskey would be more than twice as pleasurable than a $5,000 bottle of whiskey because it’s such a peak experience way out in the extreme.”

By collecting memorable experiences, consumers obtain a sense of accomplishment and progress, and enhance their self-worth.

“We examine why consumers desire unusual and extreme consumption experiences, and voluntarily choose leisure activities, vacations, and celebrations that are unpleasant and even aversive. For example, many consumers choose to stay at freezing ice hotels and eat at restaurants serving peculiar foods, such as bacon ice cream. We demonstrate that such choices are driven by consumers’ striving to use time productively, make progress, and reach accomplishments (i.e., a productivity mindset). We argue that choices of collectable or memorable (unusual, aversive, extreme) experiences lead consumers to feel productive even when they are engaging in leisure activities, as they “check off” items on an “experiential check list” and build their “experiential CV.”Some of us are searching for unique leisure experiences, even when they might be less pleasurable than other options, in order to build their “experiential CV.”  Anat Keinan, Harvard University & Ran Kivetz, Columbia University

3. Flashing the cash

Some people are spending big purely to signal they’re successful. “You might feel like you need to show everyone you’ve ‘arrived’,” 

Economic theory shows demand for some goods increases as their price drops. By contrast, a ‘Veblen good’ is more in demand as its price increases, because of its exclusive and coveted nature.

“There’s a general principle that there’s a social comparison aspect of one-upping other people in our consumption. If I have a nicer bottle of wine (…) than you do then I win, and have shown how high status I am,” Norton says. But he adds people are polarised and often choose to be either extremely conspicuous or extremely inconspicuous to show high status.”

 4. The feel-good factor

And here’s the simplest reason of all: people splurge on luxury goods because they think it will make them happy. Norton, who co-authored Happy Money: The Science of Happier Spending, says that the amount of happiness you get from spending money will depend on how you spend it and not necessarily how much.

Norton says splurging on items for ourselves is finite and doesn’t add up to increases in happiness over time. Instead, he suggests spending money on experiences rather than things. “Most of us seem to be maxed out on the happiness we can get from stuff alone.”

Giving to others seems to add up to happiness over time.

There might be an even better way to get your kicks. Norton’s research proves that giving to others can make us happier people.

“It’s not that when you buy things for yourself they don’t make you happy in the moment. Of course they do. That’s why we buy them. It just doesn’t seem to add up to much happiness over time,” he says. “Giving to others seems to add up to happiness over time.”

Frugal is as Frugal Does

I’ve have always enjoyed giving to others . . . as long as I’ve made it or it’s on sale . . . (jw)


Placebo Effects of Marketing Actions: Consumers May Get What They Pay For.